The NAR Lawsuit
What we know, what we don’t, and other information we are sharing with clients
Many people are asking about the consequences of the recent National Association of Realtors (NAR) lawsuit. The federal government prevailed against the real estate industry, with the penalty calculated to reach somewhere north of $5 Billion. Some are using this verdict to predict the doom of the industry, or at least the end of how we do business. As usual, headlines seek to stir up emotions so you will click and read their story. The reality is more mundane. For one thing, the decision is being appealed, and there is a good chance it will be overturned. And even if the suit ultimately does prevail, it is going to take several years. The industry will learn to adapt. Here is a little recap of the issue, and my particular take on it.
What was the lawsuit?
The lawsuit claims that the current standard, whereby sellers pay the buyer-agent’s commission, puts the buyers at a disadvantage. It asserts that the practice forces buyers to pay a commission (because the commission is built into the purchase price) and deprives buyers of their chance to find their own representation and negotiate their own commission -if any. The theory is that having sellers pay both sides of the commission has artificially jacked up the price of real estate.
At first blush, I can understand how buyers might be inclined to agree with the headlines. The price of a home seems to bake in a 2.5-3% commission. But as you analyze the practice more fully, you’ll realize that buyers actually benefit from the current practice for a few reasons I am happy to outline here.
Why is the judgment wrong?
Brokerages do not conspire
First, brokerages and agencies do not conspire on commission rates. Each brokerage is in competition with the others (and each agent within and between brokerages is in competition for your business). The commission rate has historically been about 6%, split between sellers and buyers agents. This has never been a firm number and is always negotiable. It stays at about this rate because sellers don’t want to spend more on their side, and offering less to the buyer’s agent is not fair to that party. Yet, you will see rates down to 1% from some brokerages that are eager to attract new business. And some even go higher than 6% (7% is the highest I have personally seen). It is negotiable.
Who chooses the Buyer-Agent?
Buyers always have their own choice of representation. The fact that the commission largely comes from the selling side means buyers don’t have to shop for a buyer-agent by price, but only by reputation and experience. Still, many buyer-agents will offer a kickback to buyers in order to attract more business, and other agents require their buyers to pay them even more commission than is being offered by the sellers. Again, it is always negotiable. Current California regulations require that listings display the commission being offered to the buyer-agent, so each buyer knows what their agent is being paid before writing an offer. They may negotiate around this point with their agent.
Will this rule affect sales price?
Have you ever looked at a Home Valuation, such as Zillow or Redfin? What is your home worth? Owners frequently inquire or research the price they may get from the sale of their home. The question of home value always precedes any thought about selling costs. The question is always, “What is my home worth.” Only later will sellers inquire, “What will I net in the sale.” When the home goes on the market, the List price is likely near the sellers’ goal, but the price will be buoyed or sunk by buyer demand. In good times, prices go 10-15% higher than the list price; in worse times, they may get 10-20% less than they hoped. The point is the selling price is the price buyers are willing to pay, not the price sellers want. The costs incurred are secondary to sellers, who always want the highest possible price. If sellers have a hard number they must attain on the net, they may decide whether or not to sell. There may be discussions about the commission in regard to their closing costs. Again, commission is always negotiable. If the lawsuit prevails and removes the standard for sellers to pay the buyer-agent commissions of 2.5% or 3%, sellers will net more money. The price of homes is not going to go down simply because sellers have lower closing costs. Sellers will end up netting more, and buyers will end up paying more for the home.
Will buyers still get representation?
Currently, business is continuing as usual, and buyers have the peace of mind that their choice of agent is being paid by the seller when escrow closes. Remember, buyer-agents can represent clients for every listing on the market. Buyers have a choice of buyer-agent, and unless they have a separate agreement to pay less (or more) commission, they can choose the best agent they can find and not worry about the cost. They can use their realtor-cousin, or the neighborhood expert – the cost to the buyer will be the same. If the lawsuit ultimately prevails, buyers may be hurt by a lack of representation. They will need to find a good agent, most of whom will likely continue to charge 2.5-3% (believe me, they deserve it!). Some buyer-agents may represent buyers for a flat fee or a lower commission. Whatever that is, it will be in addition to the purchase price. Buyers will be paying extra, on top of the sales price. Due to this, instead of choosing the best agent they know, buyers are likely to find the cheapest agent they can find. I don’t think I need to spell that out any further. How often do we learn that you get what you pay for?
If you would like to read more about the NAR lawsuit, go ahead and check out these additional resources:
NAR Article: $1.8 Billion Lawsuit Could Upend the Real Estate Industry
Money.com Article: Here’s What’s Next for the Housing Market After a Massive Realtor Lawsuit
Rumana is ready to discuss the current environment with you
Transparency is a hallmark of Rumana’s business, and commission is always discussed as part of the listing agreement or buyer representation process. If you have additional questions, connect with Rumana to discuss.
